What is Proof of Work System?

Proof of work is a process of mining where the miner sets up a mining rig with good computational power to take on and solve complicated arithmetic puzzles which are also known as proof of work problems, hash puzzles or nonces. After performing several calculations upon transactions, the verified transactions are grouped together and stored on a new block on a distributed ledger or public blockchain. The process of mining authenticates the legitimacy of a transaction and creates new currency units.

The work must be moderately challenging for the miner to complete but easy for the network to verify. Many miners on the network try to be the first to identify a solutions for the mathematical problem concerning that particular block. The first miner to find a solution to the problem will announce their solution to the entire network and in turn will receive the newly created cryptocurrency unit or units as per the protocol as a reward.

As increasing computing power is added to the network and a more coins are mined, the average number of solutions to mathematical problems required to create a new block increases and this increases the level of difficulty or challenge for the miner to earn his/her reward. In Proof of Work cryptocurrencies, miners must recover hardware and power costs. This causes downward pressure on the price of the cryptocurrency from newly generated coins which encourages miners to keep bettering the efficiency of their mining rigs and finding more cost effective sources of power.

Bitcoin is an example of a cryptocurrency that uses the proof of work system.